Billed as a ‘mini-Budget, the Chancellor’s fiscal statement in Parliament this morning turned out very much not to be that.
It amounts to the biggest package of tax-cutting measures since 1972 – even bigger than Nigel Lawson’s in 1988, which had been trailed as the ‘scene setter’ in the newspapers this morning. Kwasi Kwarteng really wanted to keep some of his ‘surprise’ powder dry for that moment when he abolished the 45% tax rate for the highest earners.
Here on one hand the Government is talking about eye-watering levels of borrowing that will be needed to help with everyone’s energy bills – costing in the region of the furlough scheme, or more. Traditionally the Conservative Party has defined itself as being for ‘fiscal responsibility and prudence’. Anyone who remembers the last few General Election narratives would be forgiven for thinking this incarnation of the Party to be an entirely different beast. What happened to those so-familiar ‘don’t hand the nation’s credit card back to the ones who maxed it out’ and ‘don’t hand the car keys back to the ones who crashed it in the first place’?
The Government’s argument runs that borrowing powers used ‘responsibly’ are justified. One wonders where they are drawing the line, given that criticism of the last Labour Government and its handling of the global financial crisis.
We then on the other hand have these gigantic tax cuts of £45 billion, including a boost for bankers with the lifting of the cap on their bonuses, that abolition of the top rate of income tax for the highest earners, more ‘sticks’ to encourage those on benefits to get back into work, the cancelling of corporation tax … all this felt very ‘Tory’ in a very definitely not Cameroonian way.
‘Growth, growth growth’ is the mantra being used to lash – to whatever degree of success – the overall package together. It is all banked on achieving a sustainable trend growth rate of 2.5 per cent.
The Shadow Chancellor Rachel Reeves’ landed a blow in Parliament in her response to Kwarteng, likening him and the Prime Minister to ‘two desperate gamblers in a casino chasing a losing run’.
Was she right? Is any of it sustainable?
The £60 billion cost for the help with energy bills (by the Government’s own admission, a figure which is liable to fluctuation – and some have put at well over £100 billion) is hopefully a one (two year) off. But this is an enormous commitment to have made, without a great deal of a sense of an exit strategy.
Then, look at the £45 billion of tax cuts that have been promised. These are sums which will be ‘gone’ from Government finances within a couple of years as they all come ‘on stream’. What happens to the year-on-year debt if the gambled-on growth not only isn’t as resurgent as aimed for- but fails to materialize at all. There are huge variables at play here; the continuation of the war in Ukraine, another vicious variant of Covid, some new Nostradamus-esq upheaval- or indeed as indicators are suggesting, a sterling crisis.
The pound is at a 37-year low against the dollar. The UK 10 year government bond yields (interest rate government borrows at) are now at 3.38%, the highest level since 2011 – the cost of all this borrowed money is already rising.
The Bank of England (with its new interest rates announced yesterday, to dampen inflation) doesn’t seem to agree with the Treasury and Government (who have announced all these tax cuts, that could push inflation up) and no one really knows what the Office of Budget Responsibility thinks (as it won’t be publishing its full economic and fiscal forecast before the end of the year).
If Kwasi Kwarteng’s claims this morning that ‘this is a new era’, and ‘fiscal responsibility remains essential’ were met with some derision, neither did Rachel Reeve’s proclamation that ‘Labour believes in wealth creation’ land particularly plausibly.
Her response has left Labour in a bit of a difficult position. They have also committed to significant help with energy bills. But whilst they may not agree with the Government-styled ‘growth-promoting’ measures, they have yet to offer up any alternative – whilst also citing the last 12 years as being an ‘economic failure’. They may well yet need a ‘third way’, to coin a phrase.
We may well, as some economists have said, be in a recession already. So what matters in the run-down to the election in 2024 is whether this ‘gamble on growth’ has started to kick in, and what people feel in their pockets, from their income, and other tax cuts.
This is very much the question that is doing the rounds on Conservative MPs’ WhatsApp groups.
I’ve had it described to me by a former colleague as “Watching Liz and Kwasi is like when you are on a plane, and the air stewards’ smiles just stays resolutely in place as the oxygen masks come down. I can’t tell if it’s terrifying … or in some ways deeply reassuring that everything’s going to somehow be ok.”
One suspects the pound and the polls will show that pretty quickly.